What Are Construction Loans

What Are Construction Loans



What Are Construction Loans?
A construction loan is​ the​ type of​ loan that one gets to​ finance the​ construction of​ a​ new building or​ buildings .​
There are two basic kinds of​ construction loans: home construction and commercial construction .​
New home construction loans are typically acquired by the​ homeowner to​ cover the​ cost of​ the​ builder and building materials .​
Commercial construction loans are acquired to​ cover the​ cost of​ building commercial or​ industrial structures .​
Typically,​ the​ borrower needs to​ provide specific details about the​ building that is​ undergoing construction in​ order to​ acquire financing for the​ venture .​
The lender needs to​ ascertain the​ likelihood that the​ borrower will be able to​ repay the​ loan .​
If the​ borrower owns the​ land that the​ new home is​ being constructed on,​ that fact increases his chances of​ receiving the​ loan.
Two basic terms are offered for construction loans: short term or​ long term .​
Long-term construction loans offer more flexibility than in​ the​ past and provide such terms as​ 15 or​ 30-year fixed,​ interest only loans,​ and a​ variety of​ adjustable rate mortgages .​
The short-term loan is​ in​ place only as​ long as​ it​ takes to​ complete the​ construction and acquire a​ certificate of​ occupancy .​
The lender provides money in​ intervals to​ the​ builder so that the​ work can continue to​ progress .​
The typical time frame for the​ short-term or​ construction part of​ the​ loan is​ 6 or​ 12 months.
Construction loans are often set up so that the​ lender collects only the​ interest portion of​ the​ loan while the​ home is​ under construction- the​ interest only loan .​
At the​ time the​ construction is​ completed,​ the​ loan either becomes due in​ full to​ the​ lender,​ continues as​ an​ interest only loan before being converted to​ a​ traditional loan,​ or​ it​ is​ converted to​ a​ fixed or​ adjustable rate mortgage loan .​
If the​ loan is​ converted to​ a​ mortgage loan,​ this is​ known as​ a​ construction-to-permanent loan or​ financing program .​
The advantage to​ setting your construction loan up to​ convert is​ that you​ only need to​ complete one application and you​ only attend one closing .​
The disadvantage is​ that the​ interest rates on​ traditional loans can change during the​ time it​ takes to​ construct the​ home .​
Construction-to-permanent loans are also known as​ one-time close loans since you​ only attend one closing and save on​ closing costs.
Some construction-to-permanent loans allow you​ to​ lock in​ an​ interest rate through the​ construction and up until its completion .​
However,​ it​ is​ important to​ have an​ understanding of​ current interest rate trends at​ the​ time you​ apply so that you​ have a​ clear understanding of​ the​ advisability of​ locking in​ your interest rate .​
Plus,​ due to​ the​ possibility of​ construction delays,​ you​ should include an​ allowance for this in​ your agreement.




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